Australia follows Fed in opening door to rate cut
Last Modified: 08:19 AM, Wed Feb 06, 2019

Alice Woodhouse and Emma Dunkley in Hong Kong

FT.com. 06 February 2019
RBA cites rising global economic risks and housing market slowdown

Australia’s central bank has become the latest to open the door to cutting interest rates, sending the country’s currency to its steepest one-day drop since August and underlining how rapidly expectations for global monetary policy are being upended.

Philip Lowe, the governor of the Reserve Bank of Australia, on Wednesday held out the prospect that the next move in its key interest rate could be lower as risks from the global economy increased and the domestic housing market slowed. The RBA has held its cash rate steady at 1.5 per cent since August 2016.

In a speech in Sydney, Mr Lowe said: “There are now scenarios where the next move in the cash rate is up and other scenarios where it is down” adding that now “the probabilities appear to be more evenly balanced”.

Last week the US Federal Reserve made one of its sharpest pivots in recent memory, distancing itself from December’s projection of another two interest-rate rises this year, as chairman Jay Powell blamed “cross-currents” from China and Europe, trade tensions and the risks of a hard Brexit. Investors are also expecting the European Central Bank to push back its timing of any interest rate increases as the eurozone economy loses momentum.

“Clearly, there was a general desire by central banks last year to join the Fed to try and normalise monetary policy,” said Philip Saunders, co-head of multi-asset at investment firm Investec. However, “you’ve definitely seen a shift in growth expectations, inflation has been more benign than anticipated and people have a better appreciation of the extent to which global demand has depended on China”.

While Mr Lowe said he did not see a “strong case” for a “near-term change” in interest rates, merely putting a cut in borrowing costs on the horizon was enough to send the Australian dollar down 1.4 per cent to $0.7131, The yield on the 10-year Australian government bond dropped 6 basis points to 2.18 per cent, outperforming every other major sovereign debt market.

Paul Brennan, an economist with Citi, said Mr Lowe had called time on the RBA’s bias towards lifting rates with a shift to a neutral bias, but said the central bank was in “no hurry to make judgments about how the economic outlook will unfold this year”. Key to this will be if house prices continue to fall, how that affects the domestic economy and the state of the broader global economy.

The central bank revised down its forecasts for Australian economic growth for 2019 and 2020 by a quarter of a percentage point. Australian house prices fell at their sharpest rate in 35 years in December, bringing the annual decline to 6.1 per cent in December.

Craig James, chief economist at CommSec, said the significance of the speech was that RBA “now acknowledges that there are risks, that if manifest, could lead to the Reserve Bank cutting rates”. Beyond domestic risks, the health of the Chinese economy was an important factor for Australia, he added. China was a big trading partner for Australia but the US-China trade war had piled on pressure on the Chinese economy.

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The Financial Times Ltd.
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Publication: FT.com
Organization: Reserve Bank of Australia, European Central Bank, Investec PLC, Federal Reserve, Citigroup Inc, Commonwealth Securities Ltd.
Location: Europe, China, Sydney, Melbourne, Australia
People: Philip Lowe, Paul Brennan, Daniel Been, Craig James, Emma Dunkley, Alice Woodhouse
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